The Federal Reserve Board is trying a new tactic to control the spread of nonbank banks: making them more expensive to start.
Earlier this month, the Fed reluctantly approved the applications of three bank holding companies and a corporation to open nonbank banks, the latest in a series of applications for such institutions. Nonbank banks make business loans or offer checking accounts but do not do both, exploiting a loophole in the law that allows the parent banks to establish what amounts to branches across state lines.
The Fed made it a condition of approval that the operations must be independent of the parent company. It also made clear that approval should not be construed as "encouragement" to begin operations before Congress has decided the issue.
In a covering letter to Suburban Bank of Maryland, which has just been made available by the bank, the Fed explained what it meant by independent operations. It specified that Suburban's consumer bank in the District could not share services such as check clearing, loan payments, loan balance inquiries, receipt of deposits, trust administration services, advice to trust customers, courier services or check cashing with the parent bank unless those services were made available to other banks as well.
This means Suburban and the other applicants will have to establish or contract for separate backroom operations for each affiliate at a cost as yet undetermined. The Wall Street Journal yesterday quoted Fed general counsel Michael Bradfield as saying the limitations would make new nonbank banks "less feasible," and suggesting the added cost would dissuade parent companies from forming these subsidiaries until Congress has acted.
During the last session, the legislators failed to agree on closing the loophole in the Bank Holding Company Act that allows those institutions, as well as corporations such as Sears, Roebuck & Co., to open limited-purpose banks that either offer checking accounts or make business loans, but not both. More than 300 applications are pending from bank holding companies seeking to establish nationwide operations in defiance of laws against interstate banking.
Suburban President G. J. Manderfield said yesterday that, although the company's lawyers were aware of the Fed's concern over possible limitations on tie-in operations, he had not anticipated the response. Though Manderfield accused the Fed of changing the ground rules, he also said that Suburban would not take legal action against the Fed.
Manderfield added that the company was still studying the costs of setting up duplicate operations or contracting for them. He observed that the cost might prove expensive for regional banks such as Suburban.